IN THE FEDERAL COURT OF AUSTRALIA ) ) SOUTH AUSTRALIA DISTRICT REGISTRY ) No. SAG 38 of 1983 ) ) BETWEEN ¢& Prosecutor ANI ¢ SULLIVAN, ___._ SPRINKLERS E PrY. LIMITEn and NN ROBERT, ERIAN SULLIVA Defendant 18 April, 1984 KEELY J. Sullivan Sprinklers Pty. Limited (the company)? has been charged with five offences against s. 59(2) of the Trade director of the company at the material times, has been charged under s. 3 of the Crimes Act 1914 with boing "bhnowingly concerned in the commission of" each of the five affences. The ten charges were heard together without objection. Mr. Perry, &@C., appeared with Mr. Tor. Kavanagh for the prosecutor. At the conoencement of the hearing Wr. Kandelaars appesred on behalf of the Liquidator of the company to seek an opportunity to address on the question of penalty in the event of the company being convicted but has taken no active part in the hearing. He had no instructions as to a ples by tne company ant szccordingly 3 plea of not guilty was entered as to exch of the five charges. Mr. M. Uright appeared for Wr. Sullivan only for the purpose of seeling leave to withdraw, having appeared for him when the eharges were previously before the Court. Mr. Sullivan appeared in person, pleaded not quilty to the five charges and conducted his cum defence. Section 59¢2) of the Act provides as follows :- "Where 3 corporation, im trade or conmerce, invites, whether by advertisement or otherwise, persons to engage or participate, or to offer or apply to engage or participate, in 3 business activity requiring the investment of moneys by the persons concerned and the performance by them of work associated with the ianvestment, the corporation shall not make, with respect to the profitability or risk or any other material aspect of the business activity, a statement thst is false or misleading in a materisl particular." Bach of the five charges against the company alleges that it invited a named person (the franchisee) "to engage im a business activity namely the sale and installation of irrigation and sprinkler systems requiring 3. the investment of moneys by him and the performance by him of vork associated with the investment, and made with respect to the profitability of the business activity a statement that was misleading in a material particular.° Particulars were included in respect of each charge. It is convenient te deal first with the second and third charges which, except a5 to the dates of the alleged offences and the names of the franchisees, are identical. The particulars were identicsl, save for the name of the franchisee set out in paragraph (c}, and were in the following terms s- "Particulars €3)> The Statement was made in an undated letter om the letterhead of Sullivan Sprinklers Pty. Limited entitled'To whom it may concern - This letter is to anform you of projected sales volume and earnings for a franchisee with Sullivan Sprinklers Pty. Limited over the first 12 months'. (b>) The statement forecast a gross nonthly profit ranging from $2,000.00 in the first month to $3,000.00 in the twelfth month with anet profit of $29,500.00. (ce) The saad letter was delivered to the said John Cameron by Robert Brian Sullivan." (In the charge relating to Mr. Opie the name of John Besley Opie appeared in paragraph (c)} in place of the name John Cameron). The letter referred to itm paragraphs (a) and (c) will be 4. referred to as the letter as to projected sales volume and earnings. The letter was delivered by Mr. Sullivan to Mr. Cameron in November 1982 and to tr. Opie in March 1983 and in each case was in the following terms i- ®To whom it may concern. This letter is (sic) inform you of projected sales volume and earnings for a franchisee with Sullivan Sprinklers Pty. Lid. over the first 12 nonths. This prejection is based upon a 40 hour working weer. We have also assessed this income potential based upon our experience and Vrnowledge since November 1976.9 The letter then set aut, under the heading "Volume", a series of figures commencing st 34,000-60 for the first month and rising, by four anounts earh of $500-00, to $6,000-00 in the fifth month. It also ceantsained a colunm headed "Gross Profit', containing figures which were exactly one-half of the figures for ""Volume*, conmencing at $2,000-00 for the first month and rising, by four snounts each of $250-00, to $3,000-00 in the fifth month. For the sixth to the twelfth Donths the figures renained uraltered at $6,000-00) and #3,000-00 respectively. The prosecution contended that the statement in the da letter conveyed the meaning that the franchisee would earn the figures there set out because those figures represented the company's experience since November 1976. Although the matter is mot free from doubt [ have come to the conclusion that I showld not uphold that submission. &s a matter of contruction it must be noted that the letter expressly used the word "patential' in the sentence immediately before the columns of figures where it regerred to "this income potential'. In considering whether the meaning conveyed by the Statement in the letter uas misleading, the respondents are entitled to the benefit of other statements made to or given to the franchisee at the materisl tine which rendered it less Likely that the statement would be misleading. In this conmexion it is relevant that the advertisement, to which Mr. Cameron had responded, also referred to '"potentral" income, using the words "Very high income potential'. Eurther, Mr. Cameron was given a Letter (exhibit Z), signed by Mr. Sullivan, which stressed the amportance of the company's "training seesians" and said that it was most important "for new contractors to learn" that they "must attend them to learn hou to nake a good profit'. That letter also said that 211 neu conmtractors "must Lind same work' for themselves, stressed the importance of sales presentation and concluded & 6. "It boils doun to thiss if you attend and apply the training sessions and if you are prepared to work for 40 hours per weet you will make at least $20,000 in your first 13 months of business. We W111 do our bit and ve guarantee you that if you do yours then you will succeed." In my opinion that letter if mot consistent with the Sonstruction of the Letter as to the projected sales volume and earnings for which Mr. Ferry contends - upon which letter the prosecution bases the charge relating to Mr. Cameron. The same considerations or substantially similar ones apply te the charge relating to fis. Opie which is based upon the same letter as to projected saiss volume and earningse His visit to the company also was im response to an advertisement which referred to "potential income', At the company's office he had been given a dacument headed "How being a franchisee with Sullivan Sprinklers cam bring you security and prosperity'. That document referred to the conpany offering sn opportunity "To allow you to build s business which will be as profitable as the effort you are willing to put inte it to make it grou'. It stressed that 1t placed 'great importance on training', ineluding sales training, amd that the company "don't simply want amy person to be a franchisee within our business. We want the person to be teachsble ... presentable .o. (and} prepared to work sufficiently to be satisfied with the business opportunity (instead of) waiting for things to happen for them. They eA ut e 7 « must come in prepared to work'. Im my Gpinion that letter is not consistent with the construction of the letter as to the projected sales volume and earnings for which Mr. Perry contends — upon which Letter the prosecution bases the charge relating to Mr. Opie. In addition Mr. Sullivan aade an offer to Mr. Opie that the company would refund 75% of the franchise money paid by Nr. Opie if he did not earn $40,000 in tua years. A clause Was inserted in his contract to that effect. Mir. Ferry attenpted to reconcile that offer of a refund with the prosecution's contention that the letter as to projected sales volume and earnings (referred to in the charge) conveyed the meaning that the franchisee would earn $29,500 in the first tuelve nonths. Hovuever, in fy opinion they are not reconcilable and the figures set out in the letter as to projected earnings were only "potentisl® earnings which a franchisee 'ecouwld"' earn depending on 3 munber of Yactors including how hard he worked, how vell be applied himself to the training sessions and how successful he was in learning the art of salesmanship. As to the charges generally it was submitted by Mr. Perry that the prosecution could rely upon the "context' including an oral statement which, on Mr. Cameron's evidence, vas made by tir. Sullivan as to the source of the figures set out in the letter. Hovever, the particulars im the 8. information only refer to the statement in the letter and do not refer to any other statenent as to the source of those Figures. fir. Perry did net cite any authority in support of his submission that the prosecution could rely upon the oral statement mot referred to in the particulars) he had already conceded in his opening address that the prosecution was bound fy ifs particulars and no application was made to amend then. Before considering whether the evidence establishes beyond reasonable doubt that Mr. Sullivan did not believe the written statement given by hin to Hessrs. Cameron and Opie, it is convenient to consider paragraph (b) of the particulars of each of the toree charges relating to Hessrs. Edge, Hansen and Bevan which in esch case refers to an alleged oral statement by ir. Sullivan. As to Mr. Edge it vas alleged that Mr. Sullivan orally "forecast an income of $230,000.00 a year". In his evidence tir. Edge initially said that tir. Sullivan 'indicated to me that I vould be able to achieve an income of about 230,000 a year'. shed what he meant by the word Sindicated' he said 'Perhaps I should have been a bit elearer. I wanted to achieve an income of about $30,000 a year and really uhst he said to ne was, 'Yes, you will do that easily'*. His wife, Mrs. Edge, gave evidence that Mr. Sullivan said "that we would be able to earn a minimun of 9. $30,000 a year and that would grow, hopefully, over the years". Mr. Edge admitted that in 3 telephone conversation he had referred to a figure of $20,000 per year. Further, his evidence as to the time taken to perform the work of both giving quotations for jabs and of installing sprinkler systems was so different from the evidence of a number of other witnesses that I am Poresd toe the conclusion that either he is mistaken in his evidence as to the tine required or he Worked at a considerably slovuer rate than other franchisees. Notwithstanding those tuo matters, I regard hin and also rs. Edge as truthful witnesses and it is quite possible that Mr. Sullivan used either the vords attributed to hin by Mr. Edge or those attributed to him by Mrs. Edge or words conveying substantially the same meaning. If this were a civil proceeding it might very well be held that the evidence satisfied the civil onus of proof. However, these are criminal proceedings and the possibility of mistake as to precisely what vas said by Mr. Sullivan is such that I an not satisfied beyond reasonable doubt that those words were used rather than words that about $30,000 "could" be earned. Hr. Sullivan said in his evidence in chief =- "IT would like to clarify the point of income that I think I started to do at one stage. I do not believe I ever said to anyones you will earn it; you are 10. definitely going to earn X amount of Money o I made the point alvays that it Was possible, and If dwelt on the fact that if you were motivated enough and strong enough and your desire 1s there vou cam achieve certain things; it 15 possible." Ho cross~exanination was directed to that evidence. Mr. Edge was given and read a copy of the document (exhibit EF) headed "Hew being a franchisee with Sullivan Sprinklers can bring you security and prosperity" - 4 document also given to fir. Opie. The conments made earlier im these reasons as to thst document are equally relevant here, e.9. the stress it placed upon self-motivation, upon training in sales techniques and its express reference to the opportunity "To sallow you to build a business which will be 2S profitable as the effort you are willing to put into it ta fake 1% grow'. In considering uhat statement uas made by Mr. Sullivan I have had regard to that docunent, to Wr. Sullivan's evidence on that aspect and to the fact that in May 1982 he had been made aware that the Trade Practices Commission had received conuplaints about the company and told of fines for breaches of the Act. In the result I am not Satisfied beyond reasonable doubt that Mr. Sullivan in speaking to Mr. Edge used the uords "you will do that easily' i.¢. @arn about $30,000 per year (as Nr. Edge said in evidence) or that he told tir. & firs. Edge "that we would be able to earn a winminum of $20,000° per year (as Mrs. Edge said im evidence). li. As to Mr. Hansem it vas alleged that late in March 1983 Mr. Sullivan orally 'forecast a profit of at least $1,500.00 to $2,000.00 per month'. Nr. Hansen gave evidence that Mr. Sullivan said °an income of betueem $1,500.00 to $2,000.06 could easily be made per nonth'. Under eross-examnination however, asked to reconsider the word, °easily® he said : "As far as my knowledge, that was the uay Iounderstocd it°® and, to 3 suggestion that the werd "easily" may not have been used, he said "It could have been another word". He also said im his evidence in chief that Mr. Sullivan told him that the "first week my income could be between $350.00 and $400.00". Under cross-examination Mr. Hansen was wnable to give an explanation for the difference between that evidence and a statenent by him in am affidavit, filed in earlier court praceedings, in vhnich he said that the figures were $300.06 to $400.00 a week". Mr. Hansen 3a1so0 agreed in cross~exanination that fir. Sullivan told him that the earnings were put feruard by Mr. Sullivan on the basis that Mr. Hansen "attended all the training sessions' and that he 'worred hard". rs. Hansen gave evidence that her hustand was told by Mr. Sullivan "that he could earn, to begin wih, $1,500 to %2,000 a month'. ir. Hansen and rs. Hansem were, in my opinion, teuthful witnesses and were not seeking to mislead the Court in any waye Houvever on the evidence I an not satisfied gy 12. beyond reasonable doubt that Mr. Sullivan ssid to Mr. Hansen that an income of betusen $1,500 to $2,006 per month could "easily" ke made or (Cas slleged in the particulars) that "at least" $1,500.00 to $2,000.00 per month could be earned. As to Mr. Bevan it was alleged that in April 1983 Mr. Sullivan orally 'forecast that a person vho engaged in the said business activity could nake $20,006-$30,000 in the first yesr and up to $80,000 by the third or fourth year'. In evidence Mr. Bevan said that Hr. Sullivan told hin thst he "sould expect to make $20,000 to $36,000 in the first year, going up to $86,000 in the third or fourth year'. I accept Mr. Bevan's evidence as to what was said in relation to the Tirst year. In cross-examination he agreed that in a later telephone conversation in November 1983 he had told tr. Sullivan that he knev that Nr. Sullivan did not say to hin that he (tir. Bevan? "could earn $80,000 a year'. Mr. Revan agreed that there uas "a contradiction on face value" but said that at the time of the telephone canversation he had been tabhen by surprise "and I thought by saying that I would get rid of you as quick as possible ... I thought to go alang with what you said was the best vay of handling it that night'. Mr. Bevan knew that he was likely to be cross-examined as to the November 1983 telephone conversation ~ as was shoun by the fact that he was questioned on that subject during his evidence in chief. Mr. Bevan's memory of events vas at tines poor. Ian mot satisfied beyond 13. reasonable doubt that Mr. Sullivan spoke to him of earnings *g0ing Wp to $80,000 in the third or fourth year". fir. Sullivan said in his evidence that he was eareful an what he said ta the potential franchisees - particularly after he was uarned in May 1982 by Wr. David MacFarlane, an officer of the Trade Practices Commission, that for any breach of the Trade Practices Act he would be liable toa fine of $16,000-00 and the respondent company would be liable to a fine of $50,000-00. Mr. MacFarlane gave evidence that he had gut tr. Sullivan oan motice that the Trade Practices Commission had received complaints akout the practices of the companys; further, that he had explained to fir. Sullivan the action which might be pursued by the Commission and possibly referred to the consequences (presumably in the sense of fines} if any breach of the Trade Practices Act oecurred. Iam mot satisfed that fir. Sullivan stated to any of the franchisees referred to in the charges, Messrs. Edge, Cameron, Opie, Hansen and Bevan, that that potential franchisee or "3° franchisee "would" earn the amount slleged in the information. Or all the evidence, including the documentary exhibits and the oral evidence of the five franchisees, of the other franchisees and of the office staff of the company, together with that of Mr. Sullivan and of the Ultnesses called by him, I consider it is possible that Wr. 14. Sullivan said that the amount im question in the particular instance "could"® be earned. I have also reached the conclusion that all of the statements made by ir. Sullivan as to earnings, the subject of the charges, were made on a basis that did not exclude the need for the franchisee, im order to earn the material amourit , to attend training sessions with sufficient regularity to learn fran tr, Sullivan and his staff the mecessary techniques of salesoanship, to apply those techniques and to work hard. In this connexion exhibits F and BU, which were read by Messrs. Edge and Opie respectively before they purchased the franchises, referred in several places to the need for and the importance of the franchisees Being trained in salesmanship. Similarly Mr. Cameron before purchasing his franchise in November 1982 read exhibit Zz which stressed the importance of sales training and the need for the franchisee to work hard. Aas mentioned earlier, Nr. Hansen agreed in cross-exsmination that Mr. Sullivan had told han that the earnings vere put feruard by Mr. Sullivan on the basis that ftir. Hansen "attended all the training sessions" and that ne "worked hard'. tir. Bevan said that, when he purchased his franchise in April 1983, Mr. Sullivan told him that for tuo months he would be provided by the company with "leads" but, as to the period after the tvo months, Mr. Sullivan had "nade it clear that part of the job was a deal I vas entering into, that I vould be required to do my own is. sequiring of leads". The position is less clear on the evidence as ta what vss said ty Nr. Sullivan on this aspect to the other four franchisees, the subject of the charges. It is not necessary toe make findings on that matter because the particulars of the five charges de not state that any Statements were made to any of the five franchisees that the Company would provide all "'leads" necessary to earn the incomes specified in the particulars. The prosecution argued that tir. Sullivan, having sold the franchise, was indifferent as to uhether a franchisee succeeded or not but I reject that submission partly because of the evidence as to attenpts by tie ecaupany to get more "leads" for the franchisees and partly because it would have been against the conpany's interest to have been indifferent. The prosecution has failed to satisfy me beyond reasonable doubt that, at the material times alleged in the enarges, Mr. Sullivan did not believe the statements made by hin to the five franchisees as to incomes that 'could' be esrned. Me. Sullivan is not required to satisfy the Court that at the material times he did believe any statements he had made and was nat obliged to give evidence in the case although he elected to do so. I do not esecept every statement made by Wr. Sullivan in his evidence as being accurate} further, on 3 number of occasions he said that he uss unable to remember 16. details. He said that é- ®I feel a little bit nervous about what I am saying, in the sense of committing myself to specific things, being aware of the cross-exaninatian coming up. But Tf am trying to be as accurate as I can, of eourse, without being too committal on something I am not absolutely sure on." However, his evidence gained sone support fron the evidence of various witnesses called by hin, including in particular the evidence of Mr. Riggs, Mr. Wakely and Nr. Kevin McMahon. In addition, the evidence of Wrs. Knoblauch, a witness for the prosecution, supperted Nr. Sullivan on a number of Matters. fir. Sullivan vas crass-exanined by Nr. Perry for almost a full day of the hearing -— a tross-exanination which occupied nore than 80 pages of the transcript. That eross-exanination doubtless gained considerable support from the detailed investigation which had been carried out by the Trade Practices Commission, particularly about April-May 1983 but including, as nentioned earlier, some consideration of the affairs of Mr. Sullivan and the company as early as May 1982. The Conuission in preparing and presenting its case had the benefit of information supplied by the respondent's accountant (ir. Witehell>, and a member of the office staff {"4rs,. Knoblauch}, both of whom were called as witnesses for the prosecution, together with the five franchisees referred to in the charges and a substantial mumber of other persons who had been franchisees of the company. 17. The importance attached by fir. Sullivan to the franchisees mastering the techniques of selling taught by him at the "training sessions" and then applying those techniques as franchisees is obvious from sone of the exhibits to which E have already referred and also from the article by Mr. Sullivan, '"Suecess Motivation, Development', (exhibit 4H). Mr. Edge said in his evidence that it uas handed to him as a franchisee at 3a conference of the franchisees held by the company at Kangaroo Island in Nevenber 1982. In the introduction to the latter document tir. Sullivan said "Let me varn you that you and you alone are the key to your better future. You will have to lie in the bed you make, don't disappoint yourself'. He also said that "in business 2a good attitude is vital" and in a section headed "Cold Contacting' said : "I have made an art of creating business out of "thin air'. I pride nyself on being expert in this area. I believe that to be an efficient small business person it 15 a nust to cultivate sone oethods of cold contacting, they may sinply be door to door, business to business". Amongst other things he said that "you can't expect to be paid if you have mot done the work". He laid particular emphasis upon that aspect in 42 separate section headed, "If You Fail - Keep Going'. Another section stressed that success depends upon the undaividusl. Mr .Sullivan aiso stressed the importance of perseverance and said in the document "No matter what I tell YOU, moO nNatter what you read, I can only stinulate you into ee 18. being successful, you must choose to take the motivation and do it at your own volition and do 1t because you want to'. That document in general sets out Wr. Sulliven's "philosophy", as he callad it in cross-examining the prosecution's witnesses, that in order to suceeed the franchisees must work, must persevere and if they f3il must heep on trying. There nay be dizgferent views as to whether Mr. Sullivan's approach to the subject of salesmanship is correct but it is not for this Court to seek to determine that question. The prosecution has the onus of satisfying the Court that tr. Sullivan, at the time of masking the statements alleged in the information, did not believe them to be true, Mr. Perry saught to rely upon 2 passage from the judgment of Frankl J. in Thempson v Nastertouch I.V. Service = munber of later judgnents of the Court. That passage reads as follows :- "Therefore, in order to establish that the words 'Should earn $400 per weel hinzmum' constituted a false statement concerning the profitability of a business activity it is necessary for the informant to prove that the defendant did not believe that the forecast or prediction would be satisfied or was recklessly amdifferent eoncerning the forecast or prediction." wW 19. In my opinion that statement of the lay does not assist the prosecution in tne present case. The vords 'or was recklessly indifferent cancerning the forecast or prediction' refer to a situation where the person charged did not at the material tine positively believe that his statement was untrue but had no belie? that it vas true and was "recklessly indifferent' as to whether the words uere true or untrue. That concept must be distinguished from what, as I understand Mr. Perry's argument, the prosecution seeks to do in the present proceedings, namely, rely upon the evidentiary material as showing that, even if Mr. Sullivan believed the Statements, he was reckless in forming the belief. Mr. Perry handed in written submissions which made ait clear that "the prosecution's prinary contention (is} that reckless indifference' attracts liability. In Wy opinion the prosecution must establish more than that, in the light of the information known to him, it uas '"rerckless" of Mr. Sullivan to believe the statements made to the franchisees as to income that °could® be earned. It must satisfy the Court beyond reasonable doubt that he did not believe the statements at the time when he nade them. Evidence as to what Mr. Sullivan kneu at the tine is, of course, relevant to ohether he in fact believed. But if Nr. Sullivan was an incurable optimist who believed that incomes 'could' be earned in circumstances where nost other people, with the same bLnovledge, vould not have had the same belief, then in my opinion the statement made does not contravene s. 59(2) of 20. the Act. Having re-read the transeript of Mr. Sullivan's evidence I am not satisfied beyond reasonable doubt that at the material times he did not believe the statements made ss to) 0 incone that *could' be earned. It was urged by the prosecution that, even if the Court were not satisfied as to the charges relating to the statements nade in October and November, 1982, it should be satisfied beyond reasonable doubt that Mr. Sullivan did not im arch and April, 1983 believe the statements made by hin to Messrs. Opie, Hansen and Bevan. This submission vas supported by evidence as to the company's financial pasition, as to complaints which had been made by the franchisees both to tir. Sullivan amd to his office staff and as to statenents made to Mr. Sullivan in early March 1983 by a conmittee which had been slected by the franchisees to make representations to the company on their behalf. There 16 considerable foree in this argument but I am not satisfied beyond reasonable doubt that Mr. Sullivan did not believe the statenents he made in March and April 1983 to Messrs. Opie, Hansen and Bevan. The optimistic approach which Mr. Sullivan apparently took even at that tine is illustrated by the April 19423 "Neus Letter" which was read by Mr. Hansen and which was an exhibit tendered by the prosecution. The final paragraph of that News Letter read as follows i- "Hopefully we are well on the road to a more efficiently run business, at the same time sales are still the number 1 concerfi.s So selling fron your shoes many factors affect your personality to how clean are. Concentrate and discipline yourselves and have faith that you earn achieve the success that Sullivans knows is ont there for the taking." Accordingly all the charges against the respondent company must be dismissed and it follows that all the charges against Mr. Sullivan must also be dismissed. uring the hearing reference was made tos. 83 of the Act which provides that :- *83. Ina proceeding against a person under section $2 or in an application under sub-section 87 (1A) for an order against a person, a finding of any fact by a court made in proceedings ... for an offence against section 79, in which that person has bean found to have contravened, or to have been involved in a contravention of, a provision of Part IV or Vis prima facie evidence of that fact and the finding may be proved by production of 32 document under the seal of the court from which the finding appears.® The Court was not informed whether any proceedings under the Act have been brought by any franchisee against either Mr. Sullivan or the company. Having regard to the possibility Aa " ta of such proceedings it should be noted that the criminal charges against the company and Mr. Sullivan have been dasmissed because the prosecution has failed to satisfy the Court beyond reasonable doubt that the respondents vere gisilty of the criminal offences charged. Applicants in any civil action under tne Act would only have to satisfy the Court on the ors of proof applicable to civil proceedings. Further, any such applicants would not be confined to the narrow "particulars"® upon which the prosecution relied in these proceedings —- particulars vhich, as was pointed out earlier, prevent it from relying upon certain evidence to establish contraventions of the Act. Accordingly, it does mot follow from the dismissal of the charges in the present procecdings that any civil preceedings brought ky any of the franchisees would fail. | | | { ] l ! ! | | J | Lote ° 1 7.2 twenty-one. i i! fos. . Moe root r . jo Feaner. do. *s Keely asole fens | Deed: (8 Ayr] 8K